Options Glossary
American-style option
An option that can be exercised at any time prior to its expiration date
Ask / ask price
The price at which a seller is offering to sell an option or a stoc
Assignment
Notification by the option owner has exercised his or her rights in the options contract.
At-The-Money
A term that describes an option with a strike price that is equal or very near equal to the current market price of the underlying asset (stock/index)
Bid / Bid Price
The price at which a buyer is willing to buy an option or a stock.
Black-Scholes formula
The first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option’s strike price, expected interest rates, time to expiration and expected stock volatility.
Break-even point(s)
The stock price(s) at which an option strategy results in neither a profit nor a loss.
Calendar spread
An option strategy where you buy a farther out month option (call or put) and the sell an equal number of front month options at the strike price. Example: buy 1 XYZ May 60 call and sell 1 XYZ March 60 call. Calendar Spreads are also known as Horizontal Spreads.
Call option
An option contract that gives the owner the right but not the obligation to buy the stock/index at a specified price (strike price) for a certain, fixed period of time (until option expiration).
CBOE
The Chicago Board Options Exchange.
Closing price
The final price of a security at which a transaction was made.
Collar
A strategy where a trader/investor purchases stock then sells a near month call option and purchases a put option for insurance. For example, you purchase 100 shares of XYZ at $46 per share. You would then sell the $50 call to bring in some cash flow and also purchase a $45 put option to protect your stock investment in case XYZ were to sell off.
Condor spread
A strategy that is market neutral that takes advantage of theta decay. An example is XYZ is at $50 per share, you sell the $55 call and buy the $60 call. At the same time you sell the $5 put and buy the $40 put. You would now profit if XYZ remains above $45 per share and below $55 per share. (market neutral in nature).
Contingency order
An order that needs to be triggered by an independent event.
Contract size
The amount of the underlying asset covered by the option contract. This is 100 shares for one equity option unless adjusted for a special event, such as a stock split or a stock dividend. The default is almost always 100 shares per contract.
Credit
Money received in your account for the sale of an options contract or option spread.
Credit spread
A mostly market neutral trade where you sell an option at one price and buy an option at the next strike price higher or lower for the SAME month.
Day order
A type of order that is only good for the day it is initiated. The order, if not filled, is cancelled at the end of the trading day.
Debit
The amount of money taken out of an account when a trade is initiated.
Debit spread
A spread strategy that is directional in nature. The spread is called a Debit Spread because the transaction results in a debit from your account. (see Directional Trading manual).
Delta
A measure of the rate of change in an option’s theoretical value for a $1 change in the stock price up or down. For example a delta of .50 means that for every $1 up or down you will gain or lose $.50..
European-style option
An option contract that can only be exercised on expiration day (no early assignment).
Ex-date / Ex-dividend date
The day before which an investor must have purchased the stock in order to receive the dividend. After the Ex-Dividend date the shareholder will NOT be entitled to the dividend. Typically the stock falls the day after going Ex-Dividend by the dividend amount.
Exchange traded funds (ETFs)
Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded in a similar fashion as a single equity. Think of an ETF as a mutual fund that trades like a stock. For a complete list of ETFs please go to www.etfconnect.com
Exercise
The term used to describe the exercising of the rights of the option owner under the terms of the option contract.
Exercise price
The price at which the owner of an option can purchase or sell stock/index. This is also called “strike price” by many traders.
Expiration date
The date on which an option expires and after this date the option will cease to exist.
Expiration Friday
The last business day prior to the option’s expiration date during which purchases and sales of options can be made. For stocks, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday (Good Friday for example), the last trading day will be the Thursday immediately preceding the third Friday.
Expiration month
The month during which the expiration date occurs.
Floor broker
A trader on an exchange floor who executes trading orders for other people.
Floor trader
An exchange member on the trading floor who buys and sells for his or her own account.
Fundamental analysis
A method of predicting stock prices based on the study of earnings, sales, dividends, etc.
Gamma
A measure of the rate of change in an option’s delta for a $1 move in the stock/index.
Good-’til-cancelled (GTC) order
A type of limit order that remains in effect until it is either executed (filled) or cancelled
Historic volatility
A measure of actual stock price changes over a specific period of time.
Implied volatility
The volatility percentage that best measures what the market, as a whole, is expecting out of the stock or index for a certain period of time.
In-the-money option
An option that has intrinsic value. A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price.
Index
A compilation of several stock prices into a single number. Example: the S&P 500 Index or Dow Jones Industrial Average.
Index option
An option whose underlying interest is an index. Generally, index options are cash-settled (no stock assignment risk).
Intrinsic value
The in-the-money portion of an option’s price
LEAPS® (Long-term Equity AnticiPation Securities also known as long-dated options)
Long term calls and put options that expire up to 39 months into the future.
Limit order
A trading order placed with a broker to buy or sell stock or options at a specific price.
Margin / margin requirement
The minimum amount of money required to support an investment position.
Market order
A trading order placed with a broker to immediately buy or sell a stock or option at the best available price.
Open outcry
The trading method by which competing market makers and Floor Brokers representing public orders make bids and offers on the trading floor.
Option
A contract that gives the owner the right, but not the obligation, to buy or sell a particular stock/index at a fixed price (strike price) for a specific period of time (expiration date) .
Options Clearing Corporation
A registered clearing agency whose shares are owned by the exchanges that trade listed equity options, OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all listed option contracts.
Out-of-the-money
An adjective used to describe an option that has no intrinsic value, i.e., all of its value consists of time value. A call option is out of the money if the stock price is below its strike price. A put option is out of the money if the stock price is above its strike price
Resistance
An price area where the stock has fallen from in the past. Generally these areas are where a stock rallied to, then the sellers stepped in and overwhelmed the sellers, causing the shares to fall in price.
RHO
A measure of the expected change in an option’s theoretical value for a 1 percent change in interest rates.
Settlement
The process by which the underlying stock is transferred from one brokerage account to another when the option terms are enforced.
Settlement price
The official price at the end of a trading session. This price is established by The Options Clearing Corporation.
Standard deviation
A statistical measure of price fluctuation. One use of the standard deviation is to measure how stock price movements are distributed about the mean.
Synthetic position
A strategy that generally involves substituting a stock with a long term option (LEAP).
A method of predicting future stock price movements based on the study of historical market data such as (among others) the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume.
Theta
A measure of the rate of change in an option’s theoretical value for 1 day change in time until options expiration.
Trading pit
A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock (also called the trading floor by some).
Vega
A measure of the rate of change in an option’s theoretical value for a point change in the volatility assumption.
Vertical spread
Another name for a Credit Spread.
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